Accounting Principles and Procedures

Question 1

What are accounts and why do we have them?

Answer 1

To keep track of money coming and money going out so they know they can pay their bills and suppliers.

• So they can monitor profit and loss and company performance.
• Use the information for future business planning
• So they can submit annual financial statements to Companies House

Question 2

What is meant by the terms Gross and Net?

Answer 2

It is a financial term where gross means the total amount before anything is deducted and net means the amount after deductions

Question 3

What is the difference between statutory i.e. submitted accounts and management accounts?

Answer 3

Statutory account has to be filed/ submitted by law and has to meet a certain criteria whereas management accounts just for the purposes of running and managing the business usually internal use, but sometimes the banks use them to.

Question 4

Why is it important to carry out budget management?

Answer 4

To ensure your firms has sufficient draw down funds to meet its current and future business objectives

What would you typically include in a PLC account?
• Chairman’s statement
• Independent auditors report
• Income statement(profit and loss account)
• Statement of financial position (balance sheet)
• Corporate governance report
• Remuneration report

Question 5

What statutory accounting reports re limited companies required to produce annually?

Answer 5

Full balance sheet
income statement:
P&L
Turnover
Auditors report
Directors report

Question 6

What is GAPP?

Answer 6

Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. Normally used by smaller companies

Question 7

What are IFRS?

Answer 7

International financial reporting standard IFRS

The largest difference between the US GAAP (Generally Accepted Accounting Principles) and IFRS is that IFRS is principle-based while GAAP is rule-based. Rule-based frameworks are more rigid and allow less room for interpretation, while a principle-based framework allows for more flexibility.

Question 8

What is GAPP?

Answer 8

Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. Normally used by smaller companies

Question 9

What are IAS?

Answer 9

International Accounting Standards

Question 10

What is a balance sheet?

Answer 10

Balance sheet - A balance sheet is a financial statement that reports the businesses financial position at one point in time showing company’s assets, liabilities and shareholders’ equity at a given date.

Question 11

What is a cash flow statement?

Answer 11

Cash flow shows the actual receipts and expenditure and includes VAT.

• Reviewing cash flow can identify potential shortfalls in cash balance i.e. where you may not have enough cash in the business to pay suppliers etc.
• Review cash flow helps ensure businesses can afford to pay suppliers and employees i.e. the cash coming in is enough to cover the cash going out.

Question 12

What is a profit and loss account?

Answer 12

A summary of a business’s income and expenditure transactions usually prepared on an annual basis.

P&L Accounts demonstrate how the revenue is transformed into the net income - how the actual income the business receives transfers into profit for the year.

These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both.

Question 13

Explain the differences between a Profit and Loss statement and a Balance Sheet?

Answer 13

P&L show companies position at a moment in time, balance sheet is a statement of revenue and costs incurred over a specific period of time usually a year.

Question 14

How would you use a profit and loss statement?

Answer 14

Good decision making/ business planning
See if your business is successful and how it has grown over s period
Identifies if you are making or losing money

Question 15

At what point do you need to start paying VAT?

Answer 15

Income threshold of £85k

Question 16

How do cash flows differ from the P&L?

Answer 16

The key difference between cash flow and profit is that while profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business.

Question 17

Under IFRS 16, where must a lease be recognised, on the company accounts?

Answer 17

Under note number 6.

Question 18

What do you understand by the accruals concept?

Answer 18

Accrual accounting is one of two accounting methods; the other is cash accounting. Accrual accounting measures a company’s performance and position by recognising economic events regardless of when cash transactions occur, whereas cash accounting only records transactions when payment occurs.

Question 19

What do you understand by depreciation?

Answer 19

Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are furniture and IT equipment.

Question 20

What are the main types of ratio analysis used to assess a company’s financial strength?

Answer 20

• Liquidity – the ability of the company to pay its way (solvency). More companies fail due to cash flow than any other reason.
• Current Ratio = Liquid assets / Liabilities.
• Quick ratio = quick assets/ current liabilities

Question 21

What is profitability, how is it measured and why is it important?

Answer 21

Gross profit margin or net profit margin
Return on assets
Return on equity – i.e. shareholders dividends

Question 22

What is liquidity, how is it measured and why is it important?

Answer 22

Current ratio = liquid assets/ liabilities

Question 23

What is working capital, and why is it important? [be able to define WC]

Answer 23

On one hand, WC is important to because it is a measure of a company’s ability to pay off short-term expenses or debts. On the other hand, too much working capital means that some assets are not being invested for the long-term, so they are not being put to good use in helping the company grow as much as possible.

Question 24

How do you establish the financial standing of a company?

Answer 24

Shareholders’ funds/ net assets shows how much value is in the business
Dun and Bradshaw
Experian

Question 25

What publicly-available information is there on a company’s financials?

Answer 25

Government website companies house shows the balance sheet and P&L

Question 26

What information must a small company report under the Small Companies’ Regime? (s.15-16 Companies Act 2006)

Answer 26

This report has to be prepared in accordance with the special provisions relating to small companies within Part 15 of the Companies Act 2006.

A small company counts as anything that turns over less than £6.5m with less than £3.26m net assets, 50 employees. Larger than this the accounts have to be audited.

Question 27

What is creditors days?

Answer 27

The average amount of time it takes for your firm to pay suppliers